Through this course, you will start by addressing the two “big questions” of accounting: “What do I have?” and “How did I do over time?” You will see how the two key financial statements – the balance sheet and the income statement - are designed to answer these questions and then move on to consider how individual transactions aggregate to make up these financial statements. After developing a broad understanding of accounting and financial statements, you will begin to develop a more nuanced understanding of individual components of doing business, such as making a sale or building inventory. By considering many of the more common actions of a company, you will build your understanding of accounting, and explore these concepts by applying them across various types of transactions. Once you understand these individual concepts better, you will be ready to return to the overall financial statements and use them as informational tools, including building ratios.
You can do this course standalone or to qualify for the residential component of the Finance for Strategic Decision-Making Executive Education program. For more information, see the FAQ below.

Reviews

WG

Very good course (of course on a basic level - do not expect too much if you are familiar with accountings), I really liked the professor.

VB

May 15, 2020

Filled StarFilled StarFilled StarFilled StarFilled Star

Very Well designed course and interesting !!!\n\nProf. Greg Miller explains the concepts very lucidly.

From the lesson

Long-Lived Assets

As firms operate, they often use long-lived assets to execute their business models. Some of these assets are tangible, such as factories or computers. Others are intangible, such as trademarks and brands. In either case, managers face the issue of determining how much of these items were used in each period as well as the related question of how much remains. In this module, we will examine the economics of such transactions as well how accountants reflect them on financial statements. This module will also cover the most nebulous of intangible assets - goodwill.

Taught By

Greg Miller

Transcript

Welcome, at the end of the last video, I mentioned the asset impairments. And in fact, this is probably a term that you've heard mention multiple times. Maybe not impairments, maybe you hear about the company have in write- offs or write-down, etc. This begs the question that if, what actually is an impairment? Well, before we talk about what an impairment is, we probably need to review, what an asset is? Now remember, there's three criteria to an asset, probably future economic benefit, under company control, and from a past transaction. An asset impairment is when we violate that first criteria. That's where a company determines the probable future economic benefit is less than the current book value. In that case, they're going to have to adjust that asset down,to get the book value to the probable future economic benefit. That might take the asset all the way down to zero if the company has determined that the asset has no remaining probable future economic benefit. On the other hand, it's highly likely the asset still has some remaining benefit, just not as much as it was on the books for. In that case, the asset will be written down to whatever that remaining probable future economic benefit is. Now, you've seen this concept before. Remember when we talked about lower cost or market with inventory? We said if the market value of the inventory, the benefit you really thought you were going to get out of it, is lower than the cost that you have it on the books for, you'll need to mark it down. Similarly, at the end of the Goodwill video I said, well, we're not going to amortize Goodwill on some sort of a regular systematic basis, but each period we're going to assess, and make sure the value is still there. If at the end of the period if we think the value that's still there is less than we have it on our books for, then we're going to have to impair it. And even though we don't usually call these impairments, we talked about the bad debt expense and the allowance for doubtful accounts with accounts receivable, same basic idea. Sure, people owe us all that money, but we've gotta get our books down to the probable future economic benefit we're actually going to get from it. Now, you're asking yourself, at this point, well okay, how do I calculate the impairment? The exact method really varies depending on the asset. If you think about each of these assets, they're each unique in the way we would think about probable future economic benefit is going to vary because of that uniqueness. The thing that's always the same though is, you're going to project out the future value creation, and compare that to the current book value. Now, these calculations can be pretty technical, particularly with a complicated asset like a whole factory, or Goodwill that we've already talked about, we have so many challenges even figuring out what it is. Despite the fact that these calculations can be very technical and complicated, you should always just continue to remind yourself of the basic idea of an impairment. Which is that, essentially what you're doing is applying the definition of an asset, and saying that the probable future economic benefit now has dropped compared to what I thought it was in prior periods. Now let me give you examples of a couple companies, maybe this will make it clear. We can look at Sony, who in January of 2017, announced that they were going to take an impairment on some of their Goodwill. This is their actual announcement, and you'll see that twice they explain that what they were thinking here is their future profitability. They've revised their expectations for future profitability, and they point out that it's a downward revision. Because of that, they don't believe the Goodwill continues to have the same value as they had it on their books for. As another example, we can look at Chongqing Iron and Steel company. In 2015, they reviewed their inventory and determined that some of their inventory was of lower quality than what they expected, and so they weren't going to be able to sell it the way that they normally do. They also looked at some of their other inventory and realized that market prices had dropped in general. And so even some of their better inventory may have some issues. Because of these two items, they wrote their inventory down to reflect the fact that the book value that they were carrying them at, no longer reflected the probable future economic benefit. As a final example, let's look at ExxonMobile. ExxonMobile discussed in their 2016 earnings announcement that they'd reviewed their assets, and for most of their assets, they felt like the future undiscounted cash flows were above the current values. However, for a small amount of their assets, they found that their current values for these asset groups exceeded the estimated cash flows that they're going to get. What they're saying there is that, the book value that they have them written down for, is not as much as the probable future economic benefit they now think they're going to get. So they took a charge of $2 billion to get those items down to the probable future economic benefit that they think they're actually going to receive. Okay, we've seen real companies doing this. Let me just quickly show you how you would actually record an impairment. We're going to go back to a really simple example for this. Imagine that you have inventory, and you have it under your books at a cost of $950. But as you go through and assess it, you realize the net realizable value for that inventory is only $850. Well, there's two ways you can do this. One way would be to decrease the value of the inventory directly. So right in the inventory account, you would credit it by $100. And then you would recognize an impairment expense of $100, that shows up on your current period financial statements, your income statement to be exact. And what it's telling you is $100 of value has left the firm, through an impairment rather than through normal use of this asset. Now, the other way you could do this, you still have an impairment expense, there's no way around the fact that the company has lost $100 in value, but your credit is to an allowance inventory impairment account. This is kind of that allowance for doubtful accounts that you saw before, or the accumulated depreciation, it's a contra asset. When we report our financial statements, we would net these contra assets, this allowance of $100 against the book value of 950 to come up with a net book value of $850 that we will report. You can see that both of these methods get us to that $850 book value, there are just different ways of keeping track of your books as you go along. I hope this is clarified impairment, so the next time you hear somebody talk about impairments, write-offs or write-downs, you realize it's a pretty simple concept and you're on top of it.

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